Tenant Representation Services

Rightsizing - Subleasing

2010 to 2011 will see a strong increase in the sub-leasing market throughout Australia as many companies opt to reduce leasing costs and consolidate operations.

In addition to subleasing, there will be opportunities for many tenants with less than two (2) years remaining on their existing leases to restructure and renegotiate terms to achieve reduced operating costs and gain greater lease flexibility.

Disposing and Consolidating Space

There are five (5) options and measures to disposing of part / whole space and reducing operational costs:

1. Approaching the Lessor for a Payout
   This involves approaching the Landlord and negotiating a payout based upon your existing leasing obligations. This payout could represent 60% to 80% of the value of your lease obligations.

   The downside of this approach is that in difficult markets where the supply of commercial space exceeds tenant demand it is highly unlikely that the Landlord will agree to a payout.

2. Approaching the Lessor for Re-Negotiations
   This involves approaching the Landlord to downsize operations and re-negotiate a new direct lease for smaller space.

   If you have in excess two (2) years remaining on your existing lease the Landlord may consider surrendering your existing terms in return for a new direct lease over smaller space for a longer term.

3. Transfer to Incoming Tenant
   This involves finding an incoming tenant who is willing to lease your premises directly from the Landlord for a longer term.

   In some cases the Landlord would be willing to surrender your lease and negotiate a new direct lease with a new tenant who may be in a position to utilise part / whole of your existing fit-out.

4. Write-Off (Short-Term) and Negotiate Alternative Space
   This particular option is only a consideration if the remaining term on your existing lease is less than approximately eighteen (18) months.

   Under such circumstances tenants opt to write-off the cost of the remaining term of the lease and negotiate higher incentives in an alternative property. In some cases the additional incentive attained can assist towards minimising or equating to the write-off paid.

5. Subleasing part / whole of the premises to an incoming tenant
   Subleasing part or whole of your tenancy is a complex transaction as it involves open discussions with the existing Landlord, the tenant and the sub-tenant.

   In addition sub-leasing driven markets will create higher levels of competition between alternative sub-leasing opportunities and direct leases offered by Landlords and Agents. There will also be complexities in a sub-tenant agreeing to the specific terms of a lease and therefore additional negotiations may be required with the Landlord.

For a sublease to be successful the tenant should offer:

• A sub-lease term in excess of three (3) to four (4) years. Very few sub-tenants are interested in sub-leasing space for short periods (ie: one or two years)
• A rental offering a discount compared to competitive sub-leases and direct leases
• An incentive to cover any re-stacking costs
• Flexibility with the Landlord
• Simplicity in design layout and the opportunity for the sub-tenant to re-stack the premises at minimal cost

Points to Note

Subleasing property requires a coordinated strategy in the best interests of the tenant to achieve a successful outcome.

Due to the increase in companies seeking to downsize and rightsize their operations in a supply driven market in conjunction with the increase in direct leases from Landlords, it is essential to increase your success rate through:

• TRS providing strategic guidance and coordinating the necessary real estate parties to market your space effectively.
• TRS ensuring that the Agents are not related to the Property Company that manages your existing property
• TRS managing and negotiating commissions to coordinating agents.

Further Information Contacts

For further information or advice on rightsizing and / or subleasing please contact: